30 January, 2012

Is it better to pay tax than save tax?

Saving tax is a religion policy in India, so much so that people do the equivalent of walking barefoot in the desert,   to collect a few dates. People want to ensure that they pay as less taxes as possible.
While saving taxes is a legitimate aspiration, overdoing it actually does more damage than help. This is something that eludes the understanding of most people.

There are several instances where meaningless investments for the sake of saving taxes, takes place. Take the case of medical insurance… there are many who are covered adequately with a group medical insurance, by their company itself. But they still want to invest in another policy, just to save taxes under Sec 80D, where the eligible amount for self and family is Rs.15,000/-pa and that for their parents are another Rs.15,000/-pa ( Rs.20,000/-pa, if the parents are senior citizens ).  Some of them are so bent upon taking these, even though they clearly don’t require it. They offer all manner of justifications as to why an additional medical cover would actually be good for them. They go into aspects like soaring medical costs and chances of all falling ill and finding the cover inadequate in a family floater. They also very helpfully paint the scary picture of what happened to their neighbour/ friend / colleague, when they were caught short in a medical emergency. 

Having more medical cover than necessary is a waste of money. It is a sheer waste to invest Rs.15,000/- pa to save taxes of Rs.4,635/- ( even at the highest tax slab). Does not look that intelligent to do this, does it?
Then there are those who would invest in insurance policies to save taxes. Now, insurance is for security. But, from time immemorial, insurance has been sold on the plank of tax savings and investments, so much so that people now look at insurance policies only for these. The security that an insurance policy affords, is simply a forgotten footnote. When the tax season looms and the employer has delivered an ultimatum to show proof of tax saving investments, the scramble begins. It is then they come across helpful insurance agents who would invest their money and give proof of investment, the same day or the next. That ofcourse, is the magic word. 

They invest in an insurance policy, get the proof, submit it to their office – and life is bliss!

The main thing here is that most don’t know what policy they have invested in, whether that policy is suitable to them, whether the tenure invested is appropriate, what returns it could offer and whether it is a traditional or an unit linked product etc. In a nutshell, they have not evaluated the product for it’s merits and have just invested to save tax. This kind of investment is very common in our country and is doubly harmful. Firstly, they invest a big sum of money in a product that they may not need. Second, they would be bogged down with it for a longtime. Else, if they want to get rid of it, they would suffer a gut-wrenching loss. It would have been far better paying the taxes themselves, instead of shooting oneself in the foot.

Another favourite among people is to buy a home to save tax. If it is the first home, the deduction available is just Rs.1.5 Lakhs pa and tax savings would amount toRs.46,350/-, in a year. For this reason, if one were to buy a home, it can put enormous pressure on one’s finances. Due to this, one’s lifestyle becomes crimped and it stays that way, for extended periods, just to save some tax and own an asset over time.  It might have been much better just to have paid the taxes, invested the money after that, live life decently due to better cashflows ( in the absence of constricting loans ) and end up buying a property later,  when it is actually required. 

Now, comes the most interesting part. Borrowing to save tax! Come December and the scramble to submit proof sets in. Those short of cash, resort to borrowings to save tax.  People are known to take personal loans or credit card loans to invest in tax saving instruments. If one were to calculate the costs and efforts vis-à-vis how much money is being saved, it may not make much sense to do it in the first place. 

Obsession to save tax at all costs is toxic. Any investment made, even if it made for tax savings, should make sense in the overall scheme of things. It needs to be a good investment. Tax savings should be an incidental benefit. We need to realize that if we actually calculate the total costs, it may be much costlier saving taxes than paying taxes, in many cases. Save taxes, where you can. Simply pay it, if it does not make sense to save those taxes. You would be better-off that way.

Article by Suresh Sadagopan published in Business Standard on 29/01/2012

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